ACCC Calls for Stronger Penalties to Protect Australian Franchisees

In a recent Australian Competition and Consumer Commission ( “ACCC”) Media Release, the consumer advocate has called for strengthening of Australia’s Franchising Code of Conduct (the “Code”) in an effort to "better protect franchisees, including a significant
increase in penalties for breaches [of the Code], and requiring improved and more
meaningful information disclosure to franchisees."

Background

The ACCC is responsible for regulating mandatory industry codes that are prescribed
under the Competition and Consumer Act 2010 (Cth), including the Code. The activities of the ACCC in franchise matters include:

the provision of comprehensive franchise education and guidance materials;

an active Code compliance program; and

enforcement activities, including the issuing of infringement notices and court action
in cases when breaches of the law are sufficiently serious.

It is anticipated these changes, in combination with stronger Unfair Contract Terms
laws (“UCT”), would help to improve the operations of franchise businesses in Australia.

Comment from the ACCC

In a speech delivered at the recent National Franchise Convention Legal Symposium, ACCC Deputy
Chair Mick Keogh said the Code was “not as effective” as it could be:

“Both the Franchising and Oil Codes, which applies to service stations, are not as
effective as they could be. We want to see the Franchising Code strengthened, and
supported by stronger penalty provisions, to ensure franchise systems operate well
for all parties involved, to encourage compliance with franchise agreements, and to
keep competition on an even keel …”

The Senate Inquiry

Submissions to the inquiry focused on the operation of the Code, and various instances
in which individual franchisees have been exploited by larger networks and, specifically,
the level of disclosure currently taking place between parties.

“… the Inquiry was called in response to several high profile scandals involving networks
such as Retail Food Group, Domino’s Pizza and 7-Eleven in recent years, with allegations
that the respective business models of these companies have shafted franchisees.”

The report is expected to recommend changes to the Code, which has been criticised
by many as being “ineffective and titled in the favour of franchisors”. It is anticipated
that any changes to the Code will help provide a barrier against exploitation for
small businesses.

What’s likely to be changed?

Recommendations made by the Franchise Council of Australia include that franchise
systems be registered on a public register. However, Mr Keogh raised concerns this
may create the perception that information provided by franchisors has been audited
and verified, or “accredited”, and would result in fewer potential franchisees doing
their due diligence.

Mr Keogh also raised a number of concerns with the Business-to-Business UCT laws,
which work to protect small businesses from being forced to accept overly onerous
or unfair terms in standard form contracts they are offered by big businesses. He
said:

“The biggest limitation within the current legislation is that unfair contract terms
are not illegal … So, lacking a legal impediment, and without fear of financial penalties,
businesses have an incentive to include potentially unfair terms in their contracts.
We want to see this changed to more adequately protect small businesses, including
franchisees.”

Industry Reaction to the Recommendations

Some franchisors, including global food and beverage company Retail Food Group have
rejected calls for more disclosure, outlining a belief that the current Code offers
adequate protection. Speaking recently to SmartCompany, Michael Sherlock, founder of Brumby’s Bakery said:

“... [The inquiry] has to make everything publicly transparent … The franchise agreement
by its very nature is unbalanced … [we need] publicly available and registered franchise
disclosure documents.”

Ms Jenny Buchan, UNSW Business School Professor has also called for better disclosure,
also saying she was “disappointed in the regulator’s stance against creating a database
for disclosure documents”.

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